Market Gives Back Gains Following Quarter-Point Fed Rate Cut

Good day! A typical Fed day begins with upside in the morning. On Wednesday the market held that bias quite well. After a slight gap higher, the indices formed a two-wave continuation pattern along the highs on the 5 and 15 minute time frames. They began the previous afternoon at highs on the intraday time frame and at 8:30 am ET on the all sessions time frame, so the pattern formed on several levels. I drew the 15 minute ES setup on the chart below.

The Commerce Department released the first quarter gross domestic product data ahead of the open on Wednesday. First quarter estimates came in with a 0.6% growth, larger than the 0.2% anticipated. The number was a bit deceptive, however, because 0.8% was attributed to inventory building and final sales of domestic product fell 0.2% with final domestic sales falling 0.4%. This was the first decline since the 1991 recession.

In other news, Procter & Gamble (PG) and GM (GM) both posted better-than-expected earnings. This helped set the tone for the Dow, which would end up leading the market higher throughout the morning. The early buy pattern in the indices triggered at 10:30 ET. The S&P 500 lagged ($SPX), but it also broke higher out of the 11:00 ET correction period while the Nasdaq Composite ($COMPX) and Dow Jones Industrial Average ($DJI) each formed continuation patterns at that time.

Once the Nasdaq broke, it moved steadily into new intraday highs, thus making new highs on the month as well. The Dow used its late morning strength to propel it back into Monday's highs. This served as a solid price resistance level in the indices and it hit at the same time as the 11:15 ET correction period, helping to trigger a pullback into the early afternoon.

Volume began to decline sharply following the late morning reversal. Many market participants began to take to the sidelines ahead of the afternoon Fed announcement. The mid-day correction was fairly gradual overall, first leading to a pullback into the 5 minute 20 period simple moving average, followed by an avalanche on the 5 minute time frame at 12:00 ET that created a second wave of selling into the early afternoon. Corrective moves within a larger trend often take the form of two waves, so this created a buy setup into the 13:00 ET correction period, but the market was not too enthusiastic given the looming interest rate news.

The market fell into a trading range on the 15 minute time frame with the 15 minute 20 sma as support until 14:15 ET. The Fed once again lower the interest rates, cutting it by another quarter-point to 2%. This was what the market had been expecting, although there was speculation that they would pause rate cuts for the time being. This speculation helped create a bit of a relief rally immediately following the announcement, but as soon as the news settled the bottom began to give way. The old "buy the rumor, sell the news" adage comes to mind.

The Dow had shot back into the 13,000 price resistance level immediately after the rate cut was announced, but this price level merely served as resistance. The S&Ps were also hitting Monday's highs immediately following the news and this resistance level provided another reason for the buyers to start to hold off. A bearish triangle quickly formed on the 2 minute time frame along the 5 minute 20 sma. It triggered at about 14:45 ET and as soon as the lower channel gave way the bears returned with a vengeance.

As I warned throughout the week to date, whenever the market creeps higher, such as it has done over the past two weeks and as it did on the 15 minute time frame coming off Tuesday's lows, the odds are quite high that the downside will be extreme once the channel gives way. The 15 minute channel did so with almost no hesitation, quickly plunging the indices back to Tuesday's lows and their 15 minute 200 period simple moving averages. The weaker S&Ps managed to break through these support levels a bit, but the Dow and Nasdaq held them quite well and these price levels stalled the descent at about 15:10 ET. The market did attempt to breakdown once again into the close, but the move did not have much time to follow through and did not go too much further immediately after the closing bell either.

The Dow ended the session on Wednesday at 12,820.13, down 11.81 points, or 0.1%. 16 of its 30 components posted losses on the day with Citigroup (C) (-3.99%) and Hewlett Packard (HPQ) (-3.11%) leading those losses. On the month as a whole, however, the Dow gained 4.5%. The S&P 500 ($SPX) fell 5.35 points, or 0.4%, and closed at 1,385.59. This brought its monthly gains to 4.8%. The Nasdaq Composite ($COMPX) lost 13.30 points, or 0.5%, on Wednesday and closed at 2,412.80 for a 5.9% gain in April.

Although the post-Fed drop took the indices through their 15 minute channel lows very quickly, the daily channel remains in place. The market tested the lows of that channel on the late-day decline, as shown on my charts below. It still remains very easy for the same type of action which took place intraday on the 15 minute charts to now form on the daily time frame. As a result, I am very cautious on any plays on the long side at this time and will be favoring shorts. It would not take much for the 20 day sma to break to the downside.


Dow Jones Industrial Average ($DJI)



S&P 500 ($SPX)



Nasdaq Composite ($COMPX)